By: Robert Newstead
What is the role of a financial intermediary?
A financial intermediary is an institution or individual that serves as a middleman between real estate capital sources and borrowers in order to facilitate real estate debt and equity transactions.
The role of the financial intermediary is to act as a conduit between a borrower and the lenders. The financial intermediary puts together a loan package based on the information provided by the clients. Financial intermediaries package the loan up in a way that is descriptive, provides all the salient loan points, and identifies both the plusses and minuses of the deal for the various capital sources.
Financial intermediaries maintain relationships with all types of capital sources including money center banks, regional banks, local banks, credit unions, life insurance companies, Wall Street investment banks, pension funds, debt funds, hard money lender, mezzanine lenders, preferred equity sources, and joint venture equity.
By staying abreast of the market, financial intermediaries have a better handle on what is happening in the market, and they know which lenders and lender types are the most active in the market. They also know which lenders and lender types are the right capital sources to reach out to for a specific deal especially in economically challenging times.
Financial intermediaries are extremely valuable because they can provide a range of quotes for your deal and even if the lender doesn’t quote on your deal, you will have the knowledge that your financial intermediary went to a range of sources. It’s important that borrowers nowadays, more than ever, have the ability to go to more than one lender. We have regularly heard that the big money center banks right now are only doing loans for their largest clients, and if you don’t fall into that category, then it’s going to be very difficult for you to obtain a loan if you don’t obtain quotes from a number of capital sources.
As an example, I am in the market right now for a ground up construction loan for a client with an $80 million development. My client is very well heeled and he’s developed a number of different residential properties both for sale and for rent. We are looking for a $55 million loan for the $80 million project. At this point, we have only had three responses from lenders. Unfortunately, two quotes are from hard money lenders, and my client said that he has patience, so does not want to pay the higher rates and fees associated with a hard money loan. We also received a quote from FHA/HUD since this development will be a multifamily apartment project. However, the loan came in $14 million short of where we would normally expect it to due to statutory limits under HUD. As such, we are trying to determine the best timing to go back out to the market given the pandemic.
What Do Financial Intermediaries Do After Obtaining Loan Quotes
Once a financial intermediary has gone out to various lenders and obtained loan quotes, the financial intermediaries will put together a quote matrix for the borrower that shows the lender, the loan amount, the interest rates, the amortization, and any other loan terms that are on offer from the various lenders. The financial intermediary will then present those loan options to the client in order for the client to evaluate which financing options are best for them. There is often times a bit of back and forth between the financial intermediary and the lenders based on the goals of the client. The financial intermediary negotiates on behalf of the borrower the overall general loan terms as well as the finer points of the deal that need to be negotiated. Once the negotiation is completed, the financial intermediary takes that soft quote and turns it into a loan application with the specific lender that the borrower ultimately decides to work with. The financial intermediary and the borrower than move to negotiating the loan application.
Once the loan application is negotiated meaning both the general and specific terms of the loan have been agreed to by the borrower and the lender, you move into a phase where you are completing both lender due diligence and loan document negotiations.
Negotiating loan documents usually follow the outline of the Term Sheet and the Loan Application, but the main difference is that you will be negotiating legal points as opposed to negotiating deal terms.
In parallel, the lender will also start the due diligence on the property and arrange for third party reports from appraisers, property inspectors, engineers, and any specialists that the lender may require for the property. These third party vendors are necessary for making sure that the lenders feel comfortable with the property, and that they get comfortable with the perceived risks at the property. Assuming all the reports come out acceptable to the lender or that there are mitigating factors for any identified issues, then everyone moves towards closing.
Closing includes doing final underwriting at the property, making sure that the cash flows are the same or better than what was initially analyzed, and completing any final due diligence on the borrower and property to ensure that there are no changes to the borrower, guarantors, or property. Closing also entails doing final analysis and review of the loan documents to ensure everything is in order to close. Once that is done, the parties then proceed to closing.
After closing, the lender onboards the client, and with competent financial intermediaries, they will stay involved through the process post-closing to answer any questions and to help navigate servicing of the loan with the lender. The financial intermediary will also address any concerns that pop up from the lender side related to inspections, or any concerns that pop up on the borrower side related to payments, or anything else that may need to be completed post-closing.
Why Should You Use a Financial Intermediary
Financial intermediaries provides peace of mind, as financial intermediaries are in the market every single day. They are talking to the lenders, they understand which projects are getting financed, and they understand the deal types that are getting done in the market.
Financial intermediaries are focused on the business of finance related to real estate, and they have the relationships with capital sources that they know well. My feeling is that good financial intermediaries are very client centric, and they are highly focused on customer service for their clients.
Financial intermediaries vary where some are mortgage bankers and some are mortgage brokers. The difference between a mortgage banker and a mortgage broker is that a mortgage banking firm has a loan servicing platform whereas a mortgage brokerage solely brokers money. Honestly, it doesn’t really matter whether you prefer to use a mortgage banker or a mortgage broker as long as your financial intermediary is skilled in their trade and has the experience. Another difference among financial intermediaries is that some financial intermediaries have in house debt or equity options. Sometimes that can be useful, but it also can make things complicated because the firm will likely want the financial intermediary to broker some “in-house” capital, which may not be the optimal solution for the client.
For example, I have worked for multiple Mortgage Bankers, and often time, the firm expected you to give preference to in-house capital sources over outside capital sources. I never believed in that approach, so always ignored that request. If my in-house capital source was the best option, then I would recommend that capital source, but if they were not the optimal source, I would recommend the better capital source.
The only outside lending sources that still can have archaic policies are life insurance companies. Some life insurance companies have correspondent relationships, and can only be sourced through certain mortgage bankers. Correspondent relationships, in my opinion, are an archaic way of doing business and I hope will be done away with at some point altogether.
Guardrail Finance as a Financial Intermediary
After leaving my last company, I set up Guardrail Finance in 2013 to acts as both a commercial real estate financial intermediary and to acts as a Sponsor or real estate investments.
Over the first 8 years, I have financed nearly $1 billion worth of real estate loans on behalf of clients. The firm is active in the middle market typically representing transactions between $3,000,000 and $100,000,000. We focus on this space because the middle market is where the most activity occurs in multifamily and commercial real estate.
We act as competent advisors for our clients and we work hard to find optimal financing solutions for all of our client’s commercial real estate needs. We work on putting together Loan Packages that are both in-depth and succinct at the same time. We handle our own initial underwriting, and then communicate intelligently with the lending community about the financing opportunity.